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Despite Nigeria's vast oil riches, the sector has been plagued by persistent oil theft and vandalism over the past several years. According to some estimates, this so-called "bunkering" of oil robs Nigeria of an estimated $6 billion in annual revenue.

For a nation that relies on the oil industry for roughly 80% of its government revenue, continued theft and disruptions to crude oil pipeline networks are an overwhelming challenge. They're also a huge problem for the international energy companies that operate in the country, particularly Royal Dutch Shell .

Photo Credit: Wikimedia Commons.

Shell's woes in Nigeria Shell's Nigerian operations have consistently weighed down its financial performance and have been one of the main reasons behind its recent spate of earnings misses. The Hague, Netherlands-based energy major estimates that oil theft and vandalism at its oil and liquid natural gas operations in Nigeria last year resulted in lost output of as much as 100,000 barrels of oil per day, in total costing the company an estimated $1 billion.

Most recently, Shell was forced to shut down crude oil exports from the 400,000 barrel-per-day Forcados terminal in the Western Niger Delta, one of Nigeria's main export terminals, after it discovered a leak in one of the subsea crude export pipelines supplying the facility on March 4. As the company repairs the line, it has declared a "force majeure" on its Nigerian oil exports, which relinquishes the company from contractual obligations due to unexpected developments beyond its control.

The incident is the latest in a spate of episodes that have forced the company to temporarily suspend production. For instance, late last month, Shell shut down its 150,000 barrel-per-day Nembe Creek pipeline due to attacks that had resulted in the loss of more than 60,000 barrels of oil per day, according to Mutiu Sunmonu, head of Shell's Nigeria unit.

How Shell plans to address the threatWith these incidents suggesting that oil theft and attacks on company infrastructure will remain a problem for the foreseeable future, Shell is more eager than ever to turn things around. As part of a strategic review of its Nigerian operations, it has put up for sale its stake in four oil blocks that it owns jointly with French oil major Total and Italy's Eni in the sabotage-prone Niger Delta region. It also hopes to find a buyer for its troubled Nembe Creek pipeline.

Several of Shell's peers are also scaling back their Nigerian operations due to security concerns. Total,for instance, sold a fifth of its stake in an offshore Nigerian oil field to state-owned China Petrochemical for roughly $2.5 billion in November 2012, while Chevron last year announced the sale of five oil blocks in Nigeria's shallow waters. ConocoPhillips , meanwhile, sold its entire Nigeria unit to Toronto-listed Oando Energy Resources for $1.8 billion in cash in December 2012.

Commodity traders including Glencore and Mercuria are among the organizations to express interest in purchasing Shell's Nigerian oil assets, including its 30% stake in the four Niger Delta oil blocks and its 60-mile Nembe Creek oil pipeline. A Shell representative said the company has generated interest from more than 100 bidders for the assets, with 20 bidders still in contention.

If the company can attract a fair offer from one of these bidders, it will move closer toward its asset sale target of $15 billion through 2015 -- a strategy that should help it close the gap between its spending and operating cash flow.

A long overdue, yet good move for Shell Though one could argue that Shell, which has been operating in Nigeria for decades, should have sold its sabotage-prone Niger Delta assets long ago, at least the company is finally taking the necessary steps to address the situation. Its decision is shaped by Shell's new "fix or divest" strategy, which seeks to either improve or unload underperforming businesses.

The move should pan out to be a good one. Not only will it reduce the company's exposure to continuing security concerns in Nigeria, it will generate much-needed cash to meet its $15 billion divestment target. As Shell follows through with its new strategy for dealing with underperforming businesses, the company should gradually improve its returns on capital and cash flow, allowing for stronger dividend growth over the next few years.

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